Mr Salmond's Fiscal Plan

Yesterday's article by the First Minister in the Sunday Times (no link) on fiscal policy contained much with which I agree but also there was much to challenge.

He is surely correct to criticise the UK coalition government's fiscal authority programme as an

ideologically driven approach (that) goes too far, too fast.

Although, when Mr Salmond charges his opponents as being "ideological" I think of pots and kettles.

He is right too to argue that the UK government's austerity policy has stifled growth. We just have to note that the US economy attained its pre-recession GDP peak last year, whereas UK GDP is still just less than 4% below its pre-recession peak. It is true US GDP contracted by less during the recession, around 5% compared to 7% in the UK, but the main difference affecting recovery is an austerity policy in the UK but not - at least to the same extent - in the US. See Paul Krugman here.

I am also pleased that he seems to have adopted Bill Howatt's and my suggestion for a fiscal council in an independent Scotland! However, as is usual with many of Mr Salmon's economic pronouncements on an independent Scotland he gives us the esteemed names of the economists involved, or cites their 'support', but often as a substitute for an explanation of the how and the why. The subliminal message seems to be "internationally renowned experts are involved so independence must be a good thing" and "with such people involved you don't need to worry about Scottish independence." Given that the Scottish people clearly do need reassuring about the prospects for the economy under independence maybe that is a rational strategy on the part of the SNP. But if it is also a tactic for avoiding giving answers to tricky questions about the economy and economic policy post-independence then it should be exposed as such by continuing to ask the questions anyway.

Mr Salmond sees his "four internationally renowned economists" as forming a fiscal commission working group to

oversee the detailed technical work by civil servants on the fiscal and macroeconomic architecture around Scotland's public finances following independence, including the establishment of a credible fiscal commission which entrenches financial discipline and ensures market confidence.

To be effective a fiscal council/commission needs to be independent of government. Mr Salmond should commit to that now. He also should go further and ask his, hopefully independent, fiscal commission working group to begin by examining the veracity of claims such as those in the First Minister's article that

The latest Government Expenditure and Revenue Scotland publication for 2010-11 shows Scotland with a lower deficit to the UK as a whole. ... Relative to the UK as a whole, Scotland was in a stronger financial position to the tune of £510 for every man, woman and child.

As I showed in this earlier post the basis for this claim is simply that when Scotland gets a geographical share of oil revenues in 2010-11 it would be less worse off, or would have gone less into debt, by the £510 per person than the UK. This is not money in the Scottish peoples' pockets or the annual fiscal dividend from independence. Indeed, with oil revenues set to decline as production and the tax take falls faster than the likely trend rise in oil prices, the position is likely to reverse. Then, heaven forbid, we shall no doubt hear supporters of the Union making the same claims.

What we need is an independent body to examine such claims. A fiscal commission would be the place for that or Mr Salmond's fiscal commission working group pro tem. Failing that we need an academic body, or research team, to be resourced to provide the independent analysis.

A final point that needs to be remembered here is that Mr Salmond will tend to conduct the debate about independence and specific policy options by a black and white contrast between an independent Scotland and current policy in the UK under the Conservative-Lib Dem coalition. Of course, the status quo is not the only, or likely, counterfactual to independence. The UK can clearly have a left of centre government which would adopt different economic policies. But more relevantly, the options of further devolution with significantly enhanced fiscal powers means that much of the alleged benefits of independence for economic policy may be available without some of the likely costs of independence. Mr Salmond would like you to forget that.

I plan to post more on the costs and benefits of further devolution versus independence in the future.

Comments

[Ian Jenkins]

To be effective a fiscal council/commission needs to be independent of government."
Effective? This calls for an international perspective.
State capitalism is on the rise. Independence from national politics seems to have little future. For example, more quantitative easing is on the cards in the US, according to a speech this week by the chairman of the Federal Reserve; aggregate demand is insufficient to cut unemployment quickly enough. National politics is likely to have the final say.
Of course savers and the international order can suffer hugely from the weakening currency that national QE causes. Perhaps this is thought to be a price worth paying for societal stability in the short term in a nation - Germany thought so, but later changed its mind [see below]. And the price will escalate - for starters it has been estimated that $trillions of debt will have to be written off before the US and Europe have sustainable economies. Then pay rates will have to fall substantially over decades to be competitive - moreover technology is rapidly reducing the number of jobs the world needs.
In a recent book, the Economist's Philip Coggan refers to the inflationary policies introduced by the government of Germany in the 1920's:
"As the domestic economy became worthless, sellers demanded foreign currency; tourists could live the high life on a few dollars a day. For much of this perod, the wages of skilled workers kept up with the price rises. Industrialists and aristocrats also survived, as their debts were devalued in real termsand as land values rose. But the middle classes, who relied on savings income to supplement their salaries, were ruined."
The loose 'rules' of economics largely led to WW2. After the devastation of the world war, the Germans gave their central bank the responsibility to set monetary policy - preventing politics from interfering in the way foward in matters of finance. Bank officials were determined to avoid the earlier mistakes. The exclusion of politics has moderated there but Germany continues to prosper.
Should the loose regulation of finance in key nations be tightened up? The House of Lords thought the checks and balances in the UK were satisfactory, and asked why auditors didn't bark to alert us to the financial collapse. Unfortunately there was a fundamental flaw - audit is not independent of national government. New enforceable rules are necessary.